12-18 Months to leave your 9-5. What are you doing?

[Jonathan Rivera]

If you had a 9-5 and you had to come up with a plan to eventually never have to work for someone again. What plan would you have in mind to accomplish this goal. 

Just say your job was paying you a salary of $5,000 and you had to make that amount within 12-18 months passively.

my goal is to eventually leave my 9-5 so I can spend more time with my 3 year old, especially be there for all his events and activities.

[Randall Alan]

Quote from @Jonathan Rivera:

If you had a 9-5 and you had to come up with a plan to eventually never have to work for someone again. What plan would you have in mind to accomplish this goal. 

Just say your job was paying you a salary of $5,000 and you had to make that amount within 12-18 months passively.

my goal is to eventually leave my 9-5 so I can spend more time with my 3 year old, especially be there for all his events and activities.

 @Jonathan Rivera

Hi Jonathan,

Ok, I'll bite...

The first thing I would do would be to have you do a 'reality check' on YOUR capability to achieve such a plan.  I would start off with telling you that we did what you are asking about... BUT it takes a lot of resources to accomplish.... and we did it 7 years ago when frankly it was easier to do.

You don't really give a direction you are wanting to go with your plan.  For us we used long term rentals.  I would tell you that short term rentals would probably accomplish the goal faster, but they have more moving parts.  We preferred long term rentals because they were far less turn-over than STRs and in general required less attention... but they are also lower income comparatively.

As for the reality check - you have to start out acknowledging that you have to acquire passive assets to earn passive income. When we started out 7 years ago, our goal was for each unit we purchased to clear $300/month after all expenses including Capex and maintenance. At the time, it turned out that was a pretty easy thing to accomplish. But if you stop right there, and use that number as a baseline, at $300/month it is going to take acquiring 17 long term rental units to cover your $5,000 salary. But in reality it will take more, because once you quit your day job you become responsible for your own health insurance costs (unless covered by someone else)... so probably add $1,000/month for that as well, not to mention things like paying yourself a salary (which the IRS requires) if you are running your rentals under a corporate structure - which then necessitates employment taxes, etc. So let's call it $6,500/month to replace your salary, and at $300/month/rental that equals 22 rentals. That's a big 'Lift' to accomplish!

7 years ago we had the advantage that real estate was a lot cheaper per square foot than it is today.  To give you an idea of our situation, we paid on average $78/square foot for the properties we purchased in central Florida.  Today those same properties are worth / sell for $200/square foot... so about triple.  I could not do what I did 7 years ago, today.  In addition, interest rates were in the 3-5% range then, and today they are more in the 6-7% range - which while it doesn't sound significantly different - it is.  

So just to try to extrapolate what it would take to do what you are asking - let's say you financed 80% of each house with a loan, and had to come up with 20% down to buy each investment property.  If we picked a house value of $150,000 - which is probably low for today's average across much of the country - you are talking about needing $37,500 per house to make $300/month.  So at 17 units that is $637,500 in down payments.  At 22 units its $825,000.  

If you went the short term rental route there are a lot of other assumptions that have to come into play... like occupancy rates per month, and furnishing the units, and city/county restrictions in certain areas just to name a few.  But most would agree that STRs are quite a bit more profitable than LTRs.  So each of your STRs netted $600 per month just to pick a ballpark figure, your numbers would be cut to 1/2 the LTR rates if all went right as far as acquisition costs and the number of rentals you would need.  But, successful short term rentals are harder to come by because they often rely on location, and uniqueness (be it features of the house, or proximity to an attraction, etc - which can drive up the purchase prices.)

As for us, we started at age 47 as a way to retire 'early' (if you call 47 early!), and in our first year bought 12 rentals, followed by 10 the next year and 9 the next year.  At 20 units, we were able to quit our corporate jobs and manage our rentals full time.  Today we self-manage 37 rentals.

Speaking of management - realize that if you don't self manage your units- about 1/3 of your profit will end up going to your property management company (based on a rental rate of $1,000/month and $300 net profit).  This can be a significant drag on your numbers.  I would tell you that self-managing is really pretty easy.  We self managed our units until we quit our jobs while working those 2 corporate jobs.  There isn't nearly as many issues as you would think on a daily basis, and most issues can be resolved with a phone call at lunch, etc.  

One thing to note is that it does get easier the more units you acquire.  Partly because you become more experienced, but also because the $300/unit/month starts to add up quicker to acquiring the next unit.  For instance at 4 units, that is $1,200/month, or $14,400/year extra you are taking in.

The thing I would suggest to you is that real estate investing is more of a long term game for most people.  You are wanting a compressed timeline (12-18 months).  If you have the resources it can be done.  If you don't, it will stretch your timeline... but the key is TO START. One thing most people miss is something I already mentioned in passing... which is Appreciation.  So each of the units we own has at least doubled and in some instances tripled in value in 7 years.  That is crazy appreciation, and I would tell you not to expect that... but think about it this way... You spend $37,500 to buy a $150,000 property and 7 years later let's just say it's worth $300,000 (double).  If you sold that unit for the $300,000, you effectively made $150,000 off your $37,500 investment after subtracting off your purchase price (and that is neglecting mortgage pay down, and tax benefits, etc).  That's a 400% increase in 7 years!  You don't pocket all of that due to capital gains, but appreciation is actually the biggest perk of real estate - not the cash-flow.  You WANT the cash flow, but it isn't anywhere close to the appreciation gain you will likely make!

What got omitted above is that other things increase as well over time.  With big appreciation we were able to sell a few units which we used to pay off other units with the highest interest rates we had.  This in turn super-charged the free and clear units because all the principle and interest moved into the profit column once we paid them off.  So instead of making $300/unit/month, those units started making $700-800/month!  Our average dollars per door across our entire portfolio is now over $700/month.   So again - things sort of snow-ball the longer you are in the industry. 

If you have the resources you could make a big difference in the sort term... but even if you don't, real estate will reward you to what ever capacity you can invest in it! 

I hope some of the insights helped!  The key is to start!

All the best

Randy